Trouble Ahead for Social Security Recipients

As I described in a previous, December 11, 2012 post, a stock of productive capital is needed to generate the output and associated income needed to support people in retirement.

In other words, current workers need sufficient capital to enable them to produce enough goods and services to not only support themselves and their families but also current retirees.

The economy is like a pie in that the larger the pie, the more people it will feed and what retirees need is an economic pie that is large enough to feed them along with everyone else even though they are no longer working and producing.

The U.S. Social Security System has always been a risky bet at best, being basically a ponzi type system in which current investors (eg., workers) payments are used as payouts to existing retirees rather than being invested for their own retirement.

Like any ponzi type scheme, the system worked initially as the number of working people was more than enough to support existing retirees.

By having large families, the post war generation of workers ensured that the system would take care of them despite the fact that their life expectancy ended being considerably longer than that of the first generation of retirees under the system.

However, the post World War II Boomer Generation (of which I am a member) is not going to be so lucky.

First of all, this generation tended to postpone marriage and having children until later in life with the result that the generation immediately behind them is small.  As the boomers approached their forties, they did start having children and, on net, have a generation as large as their own behind them.

However, most of this generation was born late and is just now entering the workforce at the same time their parents are beginning to retire.

Second, the prolonged 2008 recession has resulted in double digit unemployment for the new generation just as they begin their careers.  Not only is this high unemployment among youth keeping any of them from working and paying Social Security taxes now, the late start in the labor force will impact their future wages which will further reduce money available for benefits.

Finally, the recession has also resulted in many members of the boomer generation losing their jobs and having to take Social Security early putting further pressure on the system.

Many people may be surprised to learn that Social Security is not a pension plan in the sense that benefits are paid out of earnings on the investments made with their tax payments.  Instead, the program has always been a simple transfer of income from current workers to retirees.

For the Social Security System to work as planned for the boomer generation, the U.S. will need a quick end to the current recession as well as strong economic growth.

Given what is happening in Greece and other places where Social Security type systems are breaking down, it is probably a good strategy for current recent retirees and those near retirement to have a back-up plan for possible cuts in the system.

I doubt that the system will disappear completely, especially for older retirees.  However, at a minimum the cost of living adjustment (which was not a part of the original law but an amendment added during the inflation of the late 1960s and early 70s) will be adjusted or eliminated completely.

There is also talk about means testing for benefits which means that benefits would be reduced or eliminated for those with other sources of income (pensions, IRAs, 401(k)s, part-time jobs or other household income.

As mentioned above, Social Security is not a pension plan but basically a welfare program designed to transfer income from those with wage incomes to those retired and not receiving a wage income.

While I doubt that the Social Security program will be eliminated completely (as retirees plus those who have been paying Social Security taxes for a number of years probably outnumber, in terms of votes, those who are just entering the labor force and have no real financial stake in the system, as either long time tax payers or recipients) but I will not be surprised if cuts and restrictions are enacted in the foreseeable future.

I elaborated these concerns about Social Security cuts and arguments supporting my concern (including links to Supreme Court cases stating that Social Security is not a pension system but a welfare plan which Congress can change at any time) in a HubPage article entitled The Social Security System's Achilles Heel. 

In a third and final post I will explain potential problems with employer administered defined benefit pension plans.

Pending Financial Problems Depend upon How YOU Define Retirement

Read the current financial news today and much of it a abuzz with articles warning about how most of us nearing retirement are seriously unprepared financially to retire. The studies these articles are based upon take current life expectancy, which is increasing, rising medical costs including the expected increase in use of medical services by seniors, and the cost of maintaining some stereotypical retirement lifestyle. When these expenses are then compared to the published information about the status of this group's retirement accounts they come up seriously short. Of course, most of the people touting this line are financial and investment adviser's whose livelihood depends upon selling the very financial products which are deemed needed to solve this pending problem. Don't get me wrong, most of these financial and investment advisers know their business, are intelligent and are professionals with high integrity. But, like all successful sales people, they not only believe in their product and are also armed with stories, which they believe, of problems people have encountered because they failed to plan properly. The stories they don't tell are the ones about the numerous people who didn't follow the financial plans and advice that these advisers tout and end up living very well.

Mention retirement and the image that immediately comes to mind is that of a person reaching 65 and exiting the labor force entirely. The person and spouse then buy an RV and hit the road or move to beautiful community for seniors where they divide their time between golf, swimming and cookouts with fellow seniors. Following the active retirement lifestyle comes the medical problems that result in the retirees spending their remaining days in care homes and spending thousands of dollars per month for medical and other care. These are the people who the media and experts have in mind when they write the scare stories about a pending crisis in retirement funding.

However, individuals are unique and the fact is that individual people are different and have different desires and expectations. Not everyone retires at sixty-five. As I mentioned in a previous post entitled What Will Happen When the Boomer Generation Retires, increasing numbers are voluntarily electing to continue working full or part-time. Some, who failed to make adequate provision for retirement, do it out of necessity, some do it for the money alone, but others, their financial security taken care of by savings and generous pensions, are working by choice. In addition to the increasing numbers who are electing to continue to work and earn some income, others see their expenses decrease substantially in retirement. Many people enter retirement with the car, mortgage and other bills paid off, the children educated and on their own and no more commuting and other work related expenses to be concerned about. For many of these people a happy retirement is spending time with the grandchildren, friends, their gardens, church and other charitable activities. For both of these groups their incomes will easily carry them through retirement.

As to high medical expenses, again people are different and those with the huge medical and care bills are probably not representative of the majority of retirees. Health and medical expenses are just starting to be given serious attention by retirement planners. Instead of merely assuming that medical expenses will be high, some planners are now beginning to recommend that people begin including healthy life style choices in their lives now so as to try to avoid high medical expenses later. The high cost of health care and pending collapse of Medicare will probably provide a bigger incentive for people to take care of themselves that all the lecturing by politicians and media public service announcements combined.

Yes, people should make plans now for their future retirement and should not hesitate to consult and use various financial experts. However, the plan, and the funding of it, should be for the individual's (and spouse) vision of what they want for retirement and not based on some, one size fits all, formula.